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Public sector demand slumps as the government enters shutdown

• On October 1, the US federal government entered a shutdown after negotiations for a new appropriations bill failed.
• During a government shutdown, essential federal government operations, such as law enforcement, air-traffic control, and social security, persist, while nonessential operations are paused and workers involved in these operations are furloughed. Thus, the current shutdown is expected to result in 750,000 federal workers being furloughed, representing a $400 million reduction in daily expenditure by the federal government.
• This significant reduction in federal spending and operations will affect the entire US economy, weakening aggregate demand and slowing economic growth. For example, the 35-day government shutdown in Q1, 2019, reduced aggregate demand in both the public and private sectors, resulting in a 0.2% reduction in GDP growth that quarter.
• The effects of the shutdown are likely to be most acute in markets where the public sector is a major buyer segment, weakening demand and increasing average vendor risk by destabilizing important revenue streams.
• As negotiations for a new appropriations bill to reopen the government remain ongoing, ProcurementIQ will continue to monitor the situation and update this story with the latest information.

Elevated Tariffs are increasing prices for law enforcement, security, and safety equipment

• The Trump administration’s reciprocal tariffs, which place broad tariffs on all imports from most US trade partners, are set to take effect on August 7 after the tariff rates were finalized on August 1.
• As a result, all foreign suppliers in law enforcement, security, and safety equipment will face significantly increased costs when selling products to US buyers, and domestic manufacturers of these goods will face higher costs when sourcing key inputs for these products.
• Countries such as China, Germany, Mexico, Thailand, and Vietnam are leading sources of imports in this sector, providing high quantities of goods such as safes, locks, security cameras, security systems, and personal protective equipment. Starting August 7, imports from China, Germany, Mexico, Thailand, and Vietnam will be subject to tariff rates of 54.0%, 15.0%, 25.0%, 20.0%, and 19.0% respectively.
• Elevated tariffs are likely to impact pricing and supply chains in this industry due to the United States’ reliance on imported manufactured goods, which gives foreign suppliers the leverage to pass through the costs of tariffs to buyers and domestic suppliers the leverage to raise prices.
• Consequently, the Yale Budget Lab projects a 39.2% average increase in metal product prices, impacting products such as security gates and safes. Electronic security devices, such as cameras or metal detectors, are projected to rise by 18.7% in price. In the personal protective equipment market, prices are forecast to rise by between 11.0% and 37.5%, depending on the type of equipment and materials used to make it.

Russian invasion of Ukraine is putting additional strain on US chip supply

• Until recently, the United States sourced nearly all of its neon gas (an essential material in the laser imprinting process to produce semiconductors) from Ukrainian and Russian producers. Previous conflicts between the two nations, specifically related to the Crimea conflict in 2014, resulted in a nearly 600.0% increase in the price of neon.
• The Russian Ministry of Industry and Trade announced in early June that it would be limiting neon gas exports as part of its sanctions against countries it views as unfriendly. This move will add to lead times and prices for neon.
• Downstream semiconductor manufacturers keep stockpiles of neon gas that have allowed them to continue manufacturing chips, though it is unknown how long these stockpiles will last. Semiconductor manufacturers will likely pay higher prices for neon gas outside Ukraine as global supplies dwindle.
• Micron plans to build largest microchip production complex in US history.